Welcome to the new Becker-Posner Blog, maintained by the University of Chicago Law School.

August 2006

08/06/2006

Gambling through lotteries, stocks, casinos, and in other ways is common throughout the world. Economists explain this by both process and outcomes. By "process" I mean that many people enjoy the thrill of the risk involved in gambling-this is sometimes called "the utility from gambling". This enjoyment of gambling is the dominant factor behind the many small gambles that people take while playing poker, cards, slot machines, blackjack, craps, and other games. Gambling is also attractive when, as with lotteries, it offers a small probability of winning a lot, and thereby changing significantly one's economic situation, even when combined with a large probability of losing a little. Economists explain this by assuming the marginal utility of income in rising in some income intervals.
Put in this context, the popularity of online gambling is not at all surprising. It offers highly convenient access to gaming situations from one's home or office that includes also flexibility as to amount wagered, many different types of gambles, and relatively good odds. Nor is it surprising, however, that the American government and the governments of most other countries are unhappy about internet gambling, and try to either prevent or tax it.
The approach to gambling by state and local governments of the United States is fairly typical of what happens elsewhere. Gambling was long officially banned in all states except Nevada, but it persisted illegally in the form of numbers, bookies, card games, and in other ways. The hit musical of several decades ago "Guys and Dolls" based on a story by Damon Runyan centers around a floating game of craps in New York hosted in different venues to avoid police. Eventually, state governments saw the tax revenue potential of state-run lotteries when combined with continued prohibitions on private lotteries. Lotteries then spread from state to state. Many states now also license casinos and tax them heavily, and the federal government got into the gambling picture by the strange method of giving Indian tribes special advantages in running casinos.
Governments are concerned about online gambling primarily, I believe, because it threatens the revenue and other political advantages they get from taxing and tightly regulating various forms of gambling. Internet gambling is very hard to regulate and tax because online companies can set up in remote places and make gambling available to practically anyone who has access to the Internet. In fact, many online gambling companies are located either in ships at sea, or in very small countries that allow them to operate in return for a cut of the profits. For example, the big online betting company, BetOnSports, currently being prosecuted in federal court, has its headquarters in Costa Rica, and has other offices on the island of Antigua.
The House of Representatives by a large majority passed a bill in July that attempts to curb online poker games, sports betting, and other Internet-based wagering. Among other things, the bill would bar the use of electronic payments, such as credit-card transactions, in online wagering. This bill came six years after a similar measure was defeated. Many attribute the change in the House's vote to the Jack Abramoff scandal. That may have been the precipitating factor, but the main reason is the rapid growth in online gambling during the past six years to about $12 billion per year worldwide, with about half of that in the United States. Online gambling is fast becoming a major threat to government revenue from gambling, and to its control over how and where gambling takes place.
Supporters of this bill argue that easy access to online gambling is dangerous because it encourages and strengthens gambling addictions. The fact is, however, that gambling is even less addicted than drinking, and is not nearly as addicted as smoking. Moreover, gambling addicts can already find many ways to gamble. The vast majority of online gamblers bet modest sums for pleasure, such as the estimated 23 million Americans who now play online poker (the Pokers Players Alliance, which claims more than 25,000 members, opposed the bill).
Other supporters of a ban on online gambling claim that it is used to launder money obtained from drugs and other illegal activities. The laundering argument against gambling is largely irrelevant, given the many other ways to launder money.
I favor allowing online gambling, given the weak arguments against it, the common human desire to gamble, and also that addictive aspects of gambling are greatly exaggerated. Indeed, I also believe it should remain tax free, along with purchases of other services through the Internet. For tax-free online gambling would put pressure on governments to reduce taxes and various restrictions on lotteries and other forms of gambling. Lower taxes and fewer regulations would give individuals cheaper access to ways to satisfy the mainly harmless desire to play games for money, and to bet on sporting and other events, including lotteries.
As with many other laws, restrictions on gambling mainly impact the poor and middle classes since wealthier individuals can and do gamble through equities, derivatives, housing, and in many other ways that are not readily available to families with modest incomes. There are many ways to spend money in ways that others do not approve. Why single out families with modest incomes who may enjoy the excitement of gambling, or the dreams gambling provide about striking it rich?

08/05/2006

Shortly after our commentary on the Chicago ordinance raising wages for big box employees, Target announced that it would not go ahead with plans for a store in a depressed neighborhood on Chicago's South Side unless the mayor vetoed the City Council's ordinance. This would just be the first of a series of responses by big retail stores to this ordinance if it is allowed to take effect.
I do not believe the ordinance would violate ERISA by requiring a minimal amount of fringe benefits. After all, companies on their own sometimes raise their fringe benefits to much higher levels than those required by any law.
I like the observation that big retailers in Chicago would be induced to outsource some activities that are now found in these store, such as greater use of temps. I should have mentioned that as one of the clear predicted effects of the ordinance.
No, a rise in minimum wages does not automatically lead to greater inflation. It depends how the Fed reacts, if it reacts at all. Since even national minimum wage laws cover only a small fraction of the labor force, the Fed will surely not respond to a higher minimum imposed on large retailers in Chicago. The effect will initially be to raise unemployment of low skilled workers, and ultimately to reduce wages of low skilled workers employed at other than large retailers.
I am impressed by how often errors in economic analysis made by some commentators (including by me!) are caught in other comments. One example is the posted statement that my claim that the ordinance would encourage large retailers to substitute labor for capital is wrong because they have already made all the feasible substitutions. Another post correctly points out that a government-imposed higher wage would encourage more of these substitutions because that raises further the cost of labor relative to capital.
The crucial difference between the situations of large governments and large retailers, like Target or Wal Mart, is that retailers face very stiff competition, while large government units have considerable monopoly power. Some large retailers make big profits, but they do that usually in highly competitive markets, such as the retailing market in a big city like Chicago.
Of course, I agree that smaller stores in Chicago favor all ordinances that discriminate against large retailers. I stated that in my post.
Let me respond to the important question of how can we reduce gentrification that replaces lower income housing by middle and upper income housing. I believe in allowing supply and demand in the housing market to determine land use. Unfortunately, the balance is frequently artificially tilted in favor of gentrification by the use of eminent domain to take land away from housing low income families, and by giving tax breaks to developers who use property for gentrification purposes.

Let me return to our discussion a few weeks ago of the gender gap in college enrollments, and respond to a few of the many interesting comments. The gap in male-female median earnings is indeed less than in mean earnings because the distribution of male earnings is more skewed to the right. The greater skewness in male earnings is due to their greater variance in "skills", and to an interaction between skills and market demand. For a model of this kind (but not applied to male-female earnings differences), see my Human Capital.
To clarify my position on affirmative action for men and for various other groups, I am not claiming that non-hispanic whites do not have any desire to have African American, Latinos, and other minorities in their classes. Surely, many of them do, but I do claim that the desire of women to have a significant fraction of male students in the colleges they attend, and visa versa for men, is on the whole greater than the desire to have many members of these minority groups.
For reasons given in previous posts, I am against all government-enforced affirmative action admission-programs. Still, colleges should be free to choose their admission policies in the competitive higher education market of the United States. This includes the freedom to bring in more male students to balance a majority of female students. It also very definitely includes freedom of schools to show preference for minority students. We can argue about whether colleges should want to do this, but I leave that up to them to decide. However, it is unwise for governments to force such actions on colleges, as long as there is sufficient competition among colleges. There is enough competition in American higher education (but not in higher education in many other countries).
The war on drugs is certainly a factor, indeed I believe an important factor, in the low rate of high school completion among African-American males, and also in the higher education of African American females. The comment posted gives a good discussion of the reasons why. While there are many other forces involved, such as unstable families, the war on drugs is in principle the easiest to correct simply by legalizing drugs.
Part of the source in the gender gap in earnings during the past couple of decades is that many males who would be at the low end of the earnings distribution have dropped out of the labor force. However, there is still a sizeable gender gap in earnings even after correcting for the high male drop out rates. Moreover, the same type of selectivity applies to women since college educated women are more likely to work than women with lesser education.
Some of you in effect argue that colleges should take account of the greater variability in performance of men as well as their lower average performance. I agree and stated that in my post.